Draft copper network pricing: too low, too high - or just right?

Stephen Bell examines submissions to the ComCom's draft determination of UBA pricing

Submissions on the Commerce Commission’s draft determination of unbundled bitstream access (UBA) pricing are divided largely on expected lines into “for” and “against” camps

But while most submissions either say the Commission got the figure about right or pitched it too low, no-frills ISP Flip, a subsidiary of CallPlus, reckons the price is still too high and compromises its business model.

When pricing moves from a retail-minus to a cost-plus basis – the founding principle of the review – Flip expected to be paying Chorus “no more than $27” on its own cost estimates. The draft figure is $32.45, down from a present level of $44.98.

Even taking into account the higher cost of linking to most of its customers through a roadside cabinet rather than the exchange, Flip thought its retail price of $49.95 a month would be viable. Though it makes a loss on cabinetised customers at present levels, “our expectation was for the cabinetised customers to be viable in two years’ time when the new regulated price became effective,” says Flip’s submission

The Commerce Commission’s draft UBA price threw these estimates out, Flip says.

“You can imagine our concern for our rationally thought-out business plan when we see the draft pricing is significantly higher than the cost, and we know this for a fact as we have deployed a smaller scale version of exactly the same thing.”

Flip was further discouraged when Prime Minister John Key made it clear that government would consider changing the law to raise a price it sees as too low.

At stake, in the eyes of those who think the draft price is too low, is the viability of the Ultra Fast Broadband (UFB) fibre network and the encouragement of adequate future investment in fibre. Too low a price for the copper-based UBA will discourage customers from moving to fibre and so discourage investment in UFB, they suggest.

Chorus wants pricing higher

Chorus, installing the majority of UFB links, is seeking a lift in the UBA pricing, cites Section 18 (2A) of the Telecommunications Act, which gives the regulator room to consider the effect on forward-looking investment.

“In determining whether or not, or the extent to which, competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand is promoted, consideration must be given to the incentives to innovate that exist for, and the risks faced by, investors in new telecommunications services that involve significant capital investment and that offer capabilities not available from established services,” says the clause.

Chorus says “the aggregate effect of the Commission’s final benchmarked unbundled copper local loop (UCLL) decision and the draft UBA decision, announced on 3 December 2012 “starkly highlight the incoherent policy environment”.

“The legacy regulatory framework was set up to ensure that a vertically integrated incumbent provided wholesale services and to encourage investment,” Chorus says.

“The issues that the framework was designed to address have been resolved with UFB – and it’s now obvious that the framework is out of date and is at risk of undermining the government’s UFB vision - with some interpreting section 18(2A) as being of no effect and the future UFB investment being treated as sunk.”

Chorus says the industry may be forced to ask the Commerce Commission to move beyond the Initial Pricing Principle (IPP) of the draft determination, based on international benchmarks and determine a Final Pricing Principle FPP), which will be based on actual Total Service Long-Run Incremental Cost (TSLRIC). This will be a protracted exercise, Chorus acknowledges.

Consumers vs Chorus?

Opposition ICT spokesperson Clare Curran presents the debate starkly as a trade-off between the interests of consumers and those of Chorus and its investors.

“Our current government seems to be committed to propping up commercial interests over the public good by subsidising and protecting the interests of a few big players such as Chorus,” she says.

“Chorus’s deliberate delay tactics with the Commerce Commission are a blow to Kiwi consumers and must be condemned by the government.”

Other submitters are sceptical of the argument that the draft pricing, if confirmed, will slow movement to UFB.

“We have seen no evidence that lower UBA prices will materially undermine fibre take-up,” says Telecom. “We believe New Zealand’s investment in fibre will be supported by consumers, who will value the additional capabilities and speeds fibre services will provide.”

Section 18 does not empower the Commission to move away from a cost-based price for the sake of incentivising a move to fibre, says InternetNZ.

“We consider that the major incentive for Chorus to invest in the UFB is that it has a contract with the government which subsidises the UFB rollout. It entered into this contract in the full knowledge that the Commission would re-determine the UBA price to meet the cost-based pricing principle of the amended Act.

“Chorus must also have been aware that a move to cost based services would almost certainly reduce the price of UCLL and UBA.”

The Commission is right to reject criticisms of the UBA price because it does not agree with some parties’ expectations, says Vodafone’s submission.

The Commission had effectively raised the question “whether a price that exceeds the identified benchmark range could be justified to encourage investment in new broadband services,” Vodafone adds. "We believe that the answer to this question is no."

“The Commission is restricted to making those changes that are necessary. The objective of its UBA review is transition to cost based pricing. We doubt that setting a price that exceeds the benchmark range could be shown to be genuinely ‘necessary’ to achieve this objective.”

CallPlus and Kordia in a joint submission, point to VDSL as the technology for most likely next boost in copper speed. “In making this investment LLU builders will stimulate the demand for faster broadband services, including UFB. The cost of the regulated UBA service will not impact on investment decisions as the service is not a direct substitute.”

Like other submitters CallPlus and Kordia say Chorus should have been well aware when it bid for UFB, that copper prices would drop as a result of the move to the cost-plus regime.

“Far from being a ‘hapless victim’ of the regulated rate; Chorus has many options to extract additional margin over and above the regulated price,” they say.

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